(March 9): The surge in oil prices combined with a sagging yen raises the risk that Japan will slide into stagflation, prompting the government to ramp up fiscal spending while complicating the central bank’s mission to normalise its policy settings.
Oil topped US$100 per barrel on Monday (March 9) amid escalating hostilities in the Middle East and widening stress on oil-shipping operations and the global energy infrastructure. The yen weakened against the dollar, moving closer to a key threshold of 160 per dollar, a level where authorities intervened to support Japan’s currency in 2024. Stocks also tumbled, with the Nikkei 225 shedding around 6.9% early Monday while long-term bond yields rose.
Japan imports most of its energy needs, making its economy and inflation figures highly vulnerable to moves in crude prices. In the current predicament, the surge in oil costs comes on top of weakness in the yen, with both revving up price pressures.
The surge in oil prices comes ahead of data on Tuesday that are expected to confirm that private consumption barely advanced in the fourth quarter as households remain cautious about discretionary spending in an already elevated inflation environment.
Those concerns over Japan’s cost of living crunch are continuing to simmer. Japanese Prime Minister Sanae Takaichi led her party to a landslide victory in an election last month, partly supported by hopes that her expansionary fiscal policies would support households after inflation stayed above the Bank of Japan’s target for four straight years. But if the inflation problem appears poised to deepen, she may take a more fiscally aggressive tack.
See also: Japan stocks drop most since April on oil spike, Iran fears
“This is a double punch for Japan,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. “A spike in oil on top of a weak yen would weigh heavily on Japan’s economy. The risk of stagflation is rising without a doubt.”
Kodama stressed that it all depends on how long oil prices stay elevated. If the surge is prolonged, Takaichi would surely need to consider a fresh economic package, he said. A further increase in spending might reignite concerns among investors about the longer-term finances of the nation, fears that sparked a sharp selloff in the bond market in January.
Japan’s reliance on oil from the Middle East has hovered around 90%, hitting 95.1% in January, according to Japan’s Trade Ministry. Much of that oil makes its way to Japan through the Strait of Hormuz.
See also: Japan’s real wages advance for first time in 13 months
Brent jumped as much as 20% to about US$111 a barrel on Monday, building on a 28% surge last week. The yen weakened to around 158.71 per dollar as risk-off market sentiment boosted demand for the greenback.
Kodama expects the current economic and market environment to encourage the BOJ to refrain from raising its benchmark interest rate for the time being as officials will need to gauge the potentially heavy impact from the Iran conflict.
“The BOJ is in a very tough spot,” Kodama said. “They want to raise rates in a favourable economic environment while this Middle East situation could drag on the economy considerably.”
Figures out Tuesday are expected to show that Japan’s economy grew 1% on an annualised quarter-on-quarter basis in the final three months of 2025, after contracting by 2.6% in the previous period.
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